Ch25-Monetary-and-Fiscal-Policy-in-a-Closed-Economy經(jīng)濟學-英文版-復旦大學

1、Ch25-Monetary-and-Fiscal-Policy-in-a-Closed-Economy經(jīng)濟學-英文版-復旦大學Bringing together the real and financial sectorsHaving seen equilibrium in the goods and money markets separately,it is now time to explore the links between themand to look at simultaneous equilibrium in both.2Consumption revisitednInco

2、me is a key determinant of consumptionnbut other factors shift the consumption functionhousehold wealthavailability of creditcost of creditnThese create a link between the financial and real sectorsbecause interest rates can be seen to influence consumption.3The permanent income hypothesisnA modern

3、theory of consumption developed by Milton Friedmanargues that people like to smooth planned consumption even if income fluctuatesnConsumption depends upon permanent not transitory income.4Savings occur duringmiddle ageand dissaving in youthand old age.The life-cycle hypothesisA theory of consumption

4、 developed by Ando and Modigliani.Age0Income, consumptionDeathIndividuals try to smooth their consumption, basedon expected lifetime income.PermanentincomeThus wealth and interest rates may influence consumption.Income varies over anindividuals lifetime.Actual income5Ricardian equivalencenIndividual

5、s will react to a shock such as a tax change in different ways, depending on whether changes are seen to be temporary or permanent.nIf the government cut taxes today, but individuals realise this will have to be balanced by higher taxes in the future, then present consumption may not adjust.6Investm

6、ent demandnInvestment spending includes:fixed capitalnTransport equipmentnMachinery & other equipmentnDwellingsnOther buildingsnIntangiblesworking capitalnstocks (inventories)nwork in progressnand is undertaken by private and public sectors7Analysis of fixed investment in the UK by type of asset

7、 1965-19980204060801001201401601965197519851995 billionTransOther mc/eqDwellingsOther buildIntangibleSource: Economic Trends Annual Supplement, Monthly Digest of Statistics8The demand for fixed investmentnInvestment entails present sacrifice for future gainsfirms incur costs in the short runbut reap

8、 gains in the long runnExpected returns must outweigh the opportunity cost if a project is to be undertakennso at relatively high interest rates, less investment projects are viable.9The investment demand schedule shows how much investment firms wish toundertake at each interest rate.Investment dema

9、ndInterest rateIIAt relatively high interest rates, less investmentprojects are viable.At r0, I0 projects are viable.r0I0but if the interest rate rises to r1, desiredinvestment falls to I1.r1I110Interest rates and aggregate demandnThe position of the AD schedule is now seen to depend upon interest r

10、ates through the effects on consumptioninvestment11Monetary policywhen aggregate demand depends upon the interest rateIncomeAggregate demand45o lineAD0Y0CC 0Suppose the economy starts with consumptionat CC0, investment at I0and equilibrium at Y0.I0A fall in interest ratesshifts the consumption funct

11、ion to CC1, and leads to higher investment at I1.CC1I1Aggregate demand risesto AD1, and the newequilibrium is at Y1.AD1Y112Fiscal policy and crowding outIncomeAggregate demand45o lineAD0Y0Suppose an increase ingovernment spendingshifts the AD curve to AD1.AD1Initially, equilibriummoves to Y1.Y1But h

12、igher income raisesmoney demand, so interest rates riseand consumption and investment fall, shifting AD back to AD2 and equilibriumincome to Y2.AD2Y213Goods market equilibrium nThe goods market is in equilibrium when the aggregate demand and actual income are equalnThe IS schedule shows the differen

13、t combinations of income and interest rates at which the goods market is in equilibrium.14The IS scheduleIncomeAD45o lineIncomerAD0r0At a relatively high interestrate r0, consumption andinvestment are relatively low so AD is also low.Y0Y0Equilibrium is at Y0.Y1Y1Equilibrium is at Y1.ISThe IS schedul

14、e shows allthe combinations of realincome and interest rateat which the goods market is in equilibrium.AD1At a lower interest rate r1Consumption, investmentand AD are higher.r115Money market equilibrium nThe money market is in equilibrium when the demand for real money balances is equal to the suppl

15、y.nThe LM schedule shows the different combinations of income and interest rates at which the money market is in equilibrium.16The LM schedulerrIncomeReal moneybalancesL0LL0r0r0Y0At income Y0, money demand is at LL0 and equilibrium in the money market requires an interest rate of r0.r1Y1r1LL1At Y1,

16、money demand is at LL1,and equilibrium is at r1.LMThe LM schedule traces out the combinations of real incomeand interest rate in which the money market is in equilibrium.17Shifting IS and LM schedulesnThe position of the IS schedule depends upon:anything (other than interest rates) that shifts aggre

17、gate demand: e.g.nautonomous investmentnautonomous consumptionngovernment spendingnThe position of the LM schedule depends uponmoney supply(the price level)18Equilibrium in goods and money marketsIncomerISBringing together the IS schedule (showinggoods market equilibrium)LMand the LM schedule(showin

18、g money market equilibrium).Y*r*We can identify theunique combination ofreal income and interestrate (r*, Y*) which ensuresoverall equilibrium.19Fiscal policy in the IS-LM modelIncomerIS0LMY0r0Y0, r0 represents the initial equilibrium.IS1A bond-financed increase in governmentspending shifts the ISschedule to IS1.r1Y1Equilibrium is now at r1, Y1.Some private spending has been crowded outby the increase in therate